Of course there are issues that need to be addressed in the banking and financial industry. That’s why we initiated the financial systems inquiry. That’s why we’re acting on its recommendations.
Another reason for caution around banks from CLSA:
Politics vs Pricing Power ? Banks will not increase home IRs
Brian Johnson notes, in Australia we are heading towards a Federal Election and the posturing by both sides of politics is increasing. The Opposition Labor Party have now formally stated that if they are elected they will initiate a Royal Commission into the Australian financial services industry which has recently been plagued by a series of scandals ranging from CBA’s CommInsure life insurance claims practices, inappropriate financial planning advice (CBA, ANZ, MQG), mis-selling of credit cards (WBC), inappropriate auto leasing repossession practices (WBC) etc etc. Further the Australian Prudential Regulation Authority has specifically targeted “culture” as an area for regulatory scrutiny of regulated entities.
So what does all this mean? Whether there is a systemic issue or not media “bank bashing” will ramp up in the runup to the Federal Election. Conceivably every Labor politician interview will include some reference to bank practices and every Coalition politician will be asked for their view. The ASIC 90BBSW rate rigging case against ANZ and WBC will only amplify the opportunity to criticise the banks. In this environment we think the Australian banks will be extremely cautious, particularly when it comes to repricing upwards variable home loan rates. Any such diminishing pricing power in the home loan market right now is a real problem given that right now Australian bank funding costs have risen sharply (ie deposits, wholesale issuance, derivative costs of USD to AUD, 5 year to 90BBSW, 90BBSW OIS). This was clearly evident in the BOQ result last week, and the WBC strategy briefing the week before. BOQ HoH NIM was flat, notwithstanding the rundown of dilutive liquidity, as the benefits of upwards bankbook housing repricing were consumed by front-book discounting and rising funding costs. We see the same flat HoH NIM outcome in CBA’s 1H16 December 2015 result.
With the BOQ result, BOQ again upwardly repriced variable housing rates, clearly expecting the other banks to follow. In this environment we think there is a real chance the other banks don’t follow. In any case the evidence suggests the previous August / November 2015 housing repricing to boost NIMs to offset the rising capital requirements from July 2016 has not stuck. We remain concerned that Australian bank earnings forecasts still reflect a degree of NIM uplift which may not be there! In this context we reiterate our sectoral underweight stance and our ANZ / CBA SELL ratings, WBC underperform rating and NAB BUY rating.
Meanwhile, ScoMo is out with some more doorstop drivel:
That’s why we continue to engage with the tough cop on the beat, which is ASIC, and to work with the regulators like APRA, who I will meet again with later today, and ensure that we have the right measures in place, the right resources in place to ensure that illegal practices are clamped down on.
We’ll continue to work with ASIC and APRA and the other players that are involved in these issues to ensure that Australians can have confidence about the integrity of how they do business with banks.
David Murray is exactly right about this “bank culture” push. It’s social engineering rubbish (though more Nanny than Nazi!). You can’t change a bank’s culture, it is an extension of the context in which the bank operates. What you can do is change that context, that is the rules that govern the system. Then the culture will follow as a matter of course.
That’s why the Shorten Royal Commission may have some usefulness. But only if this is studiously avoided, at the AFR:
So, let’s say Bill Shorten wins the 2016 federal election. Who does he get to run his royal commission into the Australian financial sector?
It needs to be someone who knows the industry back to front. Someone with a reputation for fearlessly taking on the most powerful corporate institutions in the country.
Someone like … Greg Medcraft. Come on down!
Medcraft sure knows what a dodgy culture looks like having been a pioneer of the American Securitisation Forum which starred infamously in The Big Short.
Is that the kind of experience you want heading the Royal Commission into banks?
